Thursday, August 24, 2006
Re-Setting Mortgages
An adjustable rate mortgage resets when the initial interest rate is adjusted after a period of time. Many adjustable rate mortgages (ARMs) reset after two or three years, usually causing the interest rate (and the monthly payment) to increase. In 2005, $100 billion of loans reset. In 2006, $375 billion are expected to reset. 2007? It is expected that $1 trillion of mortgage loans will reset in 2007. Add to that the claim that $150 billion of the $670 billion first quarter mortgages were interest only ARMs, and the future doesn't look too good. What does this mean? A lot of people will be surprised when their mortgage payments suddenly rise! Many will be caught off-guard and unable to afford their new payments. I was speaking with someone the other day whose payment went up $200/month. It makes a budget a much more precarious thing when one line item shoots up that much. If your ARM is going to reset, start to prepare now. Make sure your credit is such that you can refinance into a fixed rate loan. If your credit isn't there, start working on it! If its too late to do that, now is still not too soon to start working on your credit so that you can escape the situation you are in as soon as possible. ARMs and interest only mortgages can certainly fill a need, but they are really best geared toward people who have money to risk. If your money is tight, don't plan on an ARM or an interest only mortgage to get you through when times get even a little bit rocky. They are higher risk mortgages.
